Perennial Real Estate Holdings (PREH SP) - DBS Research 2018-03-14: Perennial To Unleash Their Expertise In Turning Around The Capitol

Perennial Real Estate Holdings (PREH SP) - DBS Vickers 2018-03-14: Perennial To Unleash Their Expertise In Turning Around The Capitol PERENNIAL REAL ESTATE HLDGSLTD 40S.SI

Perennial Real Estate Holdings (PREH SP) - Perennial To Unleash Their Expertise In Turning Around The Capitol

  • PREH to buy 50% stake in The Capitol from Pontiac land.
  • Attractive price with upside as property turns around operationally.
  • Price paid below current “replacement costs”.
  • BUY call maintained, Target Price S$1.05.

What’s New 

Perennial Real Estate (PREH) to buy over Pontiac Land’s stake in The Capitol

  • Perennial Real Estate Holdings (PREH) receives a notice from Chesham Properties (entities of Pontiac Land) that they have elected to sell their stake in The Capitol Singapore for S$129.6m. This sale is targeted to complete within 8 weeks from the signing of the S&P.
  • The consideration was based on an agreed property price of S$1,028m, which is a 2.6% premium to the last valuation of S$1,001.8m.
  • This consideration will be paid by PREH’s internal resources and on a proforma basis, assuming that this deal is completed in Jan’17, will result in PATMI declining by c.14% from S$100.3m to S$86.9m.

Our thoughts 

The Capitol remains “lost in time” given the Impasse between shareholders. 

  • Capitol Singapore is a mixed-use development built around the historic Capitol Theatre, located in the heart of downtown Civic District and surrounded by significant landmarks. The development comprises the luxurious Eden Residences Capitol (30% sold), the planned six-star hotel The Patina, Capitol Singapore – a lifestyle shopping and dining location and Capitol Theatre.
  • Pontiac Land (Private) owns a 50% stake in the joint venture, while a consortium involving Perennial Real estate holds the remaining 50%. They developed the project at a total cost of S$750m.
  • The impasse between both shareholders since 2016 has resulted in the hotel (planned The Patina Hotel) and part of retail podium remaining closed to-date. Tenants who opened for business at the retail mall saw sub-optimal pedestrian traffic and sales as shoppers shy away, as the integrated development appears to remain perpetually “under development”.

Turnaround specialist “unleashed” at the Capitol. 

  • The closure of this unfortunate episode will enable Perennial to take full control in managing the property and set the integrated development on its way to perform to its optimal capacity. That said, more work is needed to be done given the challenges faced by retail landlords given the proliferation of online shopping and changing consumer preferences. 
  • PREH has the expertise to turn around underperforming properties (case in point – The Chijmes, located nearby, saw a significant increase in operating performance post repositioning undertaken by PREH).
  • As of end Dec’17, the retail component at The Capitol has an occupancy rate of c.85% with the opportunity to rise further in the medium term. The low hanging fruit will be to appoint a new hotel operator to manage the hotel, which will act as a catalyst to draw traffic and potential shoppers when it is opened. 
  • Given the integrated development’s prime location, proximity to the MRT with an underground link, we believe the opening of the hotel will be a source of recurring cashflows and pedestrian flow.

Buying below “replacement cost” and upside could be reaped if PREH drives operations higher. 

  • The mixed-use development was last valued at close to S$1.0bn as of Dec’17. With the acquistion price agreed at S$1.03bn, a 2.6% premium to valuation, we estimate that the agreed price translates to S$1,816 psf per plot (psf ppr) for the integrated development. We believe that there is upside to valuations given the high land prices achieved for commercial and mixed-use development sites sold during tenders in recent years. 
  • Most recently, a hotel site at Hill Street was sold to EL Development for S$118m or S$1,830 psf per plot ratio, while mixed-use sites at the Central Boulevard (IOI Properties) and South Beach (Guocoland) were sold at S$1,689 psf ppr and S$1,706 psf ppr respectively. If PREH is able to turnaround the performance of the property, we believe the property could potentially be valued at S$1,143m, a value which we believe to be achievable in the medium term
  • The fruits are there for the picking and if PREH is able to deliver, once again, on plans to turnaround the property, it will justify management’s expertise and strength in delivering high developer returns to shareholders.

Rachel TAN DBS Vickers | Derek TAN DBS Vickers | 2018-03-14
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.050 Same 1.050